Weekend analysis

Intrinsic Value is a tool that I am using to value my long term portfolio holdings in order to arrive at a value of the free cash flow that a company is generating.

For a while I have thought about establishing positions in ICA, Hufvudstaden and Hennes & Mauritz. With regards to H&M I wanted to wait for the report that was released during the past week before executing any purchases.

Hennes & Mauritz

The stock has fallen in price since the start of 2015 where the worry about lower margins and growing inventory has escalated.

Management does not seem to stand by and watch and they are taking steps to correct the problem. If I conduct a simple calculation and use 18.5 billion as the rolling 12-month earnings and 4% as the annual growth rate for the next 12 years and then 1% growth for the future together with a risk free interest of 3% I get a stock value of more than 700 SEK. The value of the free cash that H&M is generating should be valued a lot higher than the current share price of 229 SEK per share.

ICA Gruppen

Chart_17-04-02_15-40-23

The price of the ICA stock has consolidated since the beginning of 2015. The last report shows an annual profit of 3.4 billion. If I use an annual growth factor of 1% per year I arrive at an intrinsic value per share of 817 SEK. The stock closed at 305.80 this Friday and offers a very high margin of safety. I have started to acquire ICA for my long term portfolio.

Hufvudstaden

Hufvudstaden is the company within properties that I like the most currently. I both like their long term operational growth and the low leverage that they have. For my intrinsic value calculation I am using the annual operational income of 1.226 billion with a growth rate of 5% per year for the next 10 years and 1% per year after that.

The value per share that I arrive at is therefore 410 SEK per share which offers a great margin of safety compared to the current share price of 130 SEK.

Summary

The holdings in my long term portfolio is not there to be sold but to be owned. I do not care about short term fluctuations and the general stock market in the same way as I do for my shorter term trading portfolio. I have started to accumulate shares of the three companies mentioned above.

/Stefan

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